Why the transtasman income gap is larger than it appears

The transtasman income gap is larger than it appears because not only do we earn less, but also we get less value for our money. What’s the answer? By Professor Tim Hazledine.

I teach economics at the University of Auckland. One day in late May 2009, near the nadir of the global financial crisis (GFC), I was asked to go on the student radio station to talk. “I’ll bet things must be pretty frantic in your shop right now, Prof,” said the interviewer, “dealing with the economic crisis in New Zealand and all.”

“Yes,” I lied, to my shame, and changed the subject. In fact, the reality of the GFC and its implications for New Zealand barely touched the lives of most of my colleagues – theorists and specialists as they were. Seventeen – nearly two-thirds – of the economics department lecturers and professors were from abroad, and some indeed seemed hardly to notice what country they were camped in. And when the financial storm subsided, 10 would quickly scurry off to better-paying jobs elsewhere – in Australia, Singapore, Korea, Japan and the US.

This raises three questions: how come the other countries paid better; what’s wrong with economics; and how come it is so easy for economists to get jobs anywhere in the world? I’ll return to the first question, which is really important, as it is linked to the other two issues, which you do need to know about because they are important, too, and even explain how the GFC happened.

The fact is that modern economics – neoclassical economics, as it is known – is possibly the most globalised activity in the world, in any sphere: cultural, social or economic. It is globalised in the particular sense that just about all cultural, social, business and economic activities are globalised: that is, on terms set and enforced by the world’s most powerful country, America.

Economics has been Americanised in its textbooks, in its core curriculum, in the template for the PhD that is the entry requirement for employment in academia and research, and even in the extraordinary “people market” where just about all new jobs are settled – held in the first week of January each year in a large American city. That’s why my footloose colleagues were so easily able to carry their CVs across the Pacific and beyond to better-paying jobs – local knowledge not wanted – and why most economists, even when in their own country, will not be much interested in how it works.

But why were the jobs better paid? They aren’t supposed to be. According to the standard theory – and there has to be a standard theory for the globalisation of economics to work – all people are basically the same, and we all have free access to the same “technology”: the blueprints for converting input (work, capital) into output (GDP) and thus wages. The theory then predicts that, in the long run, we will all have the same incomes. And by now we – that is, the Western or First World countries – are in the long run: it’s 200 years since the Industrial Revolution began, in England.

Yet the income differences persist. In particular, we in New Zealand have lower average incomes than all our English-speaking peers: Canada, Britain, the US, Ireland, and – notably – Australia. Something wrong, surely? What could be going on here?

Neoclassical economics admits only one possible culprit: misguided government interference. If wages differ across countries, then public policy must be getting in the way of the universal efficient market outcomes, and that’s what needs to be dealt with so we can all live the blessed lives of Americans, or even Australians.

Of course, US economists don’t spend much time thinking about New Zealand. Their particular bête noire is words such as bête noire, and the people who use them: ie, the French. American neoclassical economists loathe France; they can’t stand its apparent success at running a prosperous economy in a relatively dirigiste [interventionist] policy setting, with much state ownership of industry and regulation of markets. So they have to claim that France is actually not a success story, and pinpoint in particular various “restrictive” practices in the labour market: long vacations, strong unions, high minimum wages, limitations on working hours, etc.

One of the leading US economists – Edward Prescott (Nobel Prize, 2004) – is especially upset by France. He visited Auckland in 2006, and gave a talk along those lines. At the reception afterwards, I asked him: “Professor Prescott, with your deep respect for individual rationality and autonomy, don’t you think it possible that the French simply have different tastes from Americans, and choose different policies accordingly?”

Prescott was quite annoyed by my question. “People don’t willingly submit to lower incomes,” he growled, and went off to talk to somebody else. But what if people do willingly submit to lower incomes in exchange for other attributes of the Good Life? What if national culture is not just a matter of whether you drink burgundy or Budweiser but extends to more fundamental choices made by free citizens about how their polity, economy and society should be arranged?

Let’s take this idea for a run. First, we need to rule out some other possible suspects for causing lower incomes. Could it be the workers’ fault? That is, are New Zealanders, on average, lazier and/or duller than Aussies? Well, we can kick that one into touch straight away. Transtasman migration is basically free trade in people. Anyone can do it, and thousands of ordinary Kiwi workers do – economists, plumbers, prostitutes – and all quickly find themselves earning a premium of about 20% over their income from the job they left behind.

So, the income gap can’t be to do with the inherent quality of our workforce. Could it be government incompetence – do we have bad economic policies compared with Australia? Well, certainly not according to the American economic rulebook: we have possibly the most business-friendly policies in the world.

Could “business-friendly” actually be the problem? After all, the biggest jump in the Australia/NZ income gap occurred during the near-disastrous 1984-92 period of neoliberal “reforms”, dubbed “Rogernomics” after the minister of finance who imposed them on us, (Sir) Roger Douglas.

Well, Rogernomics surely didn’t help matters, but the income gap is larger and more persistent than that. Treasury has pointed to a lack of savings and investment here. True, but this just begs the question: why do we choose to save and invest less?

I think the answer is staring us in the face, but our political, economic and media establishment is too blinkered by the Professor Prescotts of this world to see it.
Most recently, and quite typically, I read about the “key fact: New Zealand suffers from relatively poor productivity”; that we are “a less-efficient economy than we should be”; but then that this productivity gap has been stubbornly stuck for a quarter of a century, despite a zillion reports and manifestos and election promises and policies.

For heaven’s sake, I think: learn from the world as it is, not lament that it isn’t what you think it should be, but are quite evidently unable to do anything about.

We pump out less material gross domestic product than Australia (or the United States) because, as a nation, at a deep cultural level, we have somewhat different priorities about what is the Good Life and how to lead it.

My hypothesis is that New Zealanders, as a whole, just aren’t as hard-driving as Aussies; not so tough on each other. That’s not a criticism of Australia, and it certainly isn’t a criticism of Aotearoa New Zealand. Just different tastes.

Once you start looking at things from this perspective, other pieces of the puzzle fall into place. For starters, we persistently self-report higher levels of life satisfaction than do Australians (and Americans, Brits and Canadians).

Then there is the failure of so many businesses when they try to compete in Australia, and, in contrast, the success of Māori-owned businesses here, with their strong social charter, which would simply be unviable within a more hard-driven business culture.
There are the fabled “3 Bs” – bach, boat, BMW – that supposedly limit the aspirations of our entrepreneurs. And there’s the big one: our high prices.

The Australia/New Zealand income gap is actually larger than it appears. It’s not just that we earn less, it’s also that when we spend what we earn, we get less value for our money. New Zealand is a pricey country – this, again, is well known, but not hitherto taken as a signal of anything meaningful.

When I read that the franchise for my rather humdrum little local supermarket is on the market for more than $25 million – well, I know for sure that I and everyone else must be paying too much for our groceries. But we pay too much for just about everything: books, beer, building materials, bank fees, clothing, real estate brokerage, mortgages, probably petrol, electricity – a very long list. (In fact, the only thing we pay too little for is the most valuable resource of all – water – which we give away, mostly to rich people.) It’s such a long list that we could reasonably say that high prices are the rule here, not the exception as they may be in other developed countries.

You can probably see by now where this is going. If we all pay too much for just about everything, then it must be because that’s what we all want to do: an inevitable complement to the easy-going life on the production front.

I am uneasily aware that, even if I have managed to bring the reader with me thus far, the cord of credulity may now be strained to snapping point: “Prof, are you seriously claiming we should like paying too much for everything?”

Well, no, I’m not, but I will repeat what I advise the students in my public policy class – bright-eyed and eager to do good. I say: “So, you want to make the world a better place. That’s nice. But, first, make sure you thoroughly understand why it isn’t a better place already. If you don’t, then your policies will have unintended consequences and may even do more harm than good. Things have their reasons.”

So, there is going to be an inquiry into grocery prices this year. That will be interesting, but I just hope any new policies resulting don’t get deflected into squeezing the already low wages of workers in supermarkets and food-supplying industries.

Which brings me to the one truly pressing economic problem to focus on, and that is poverty, with its faithful handmaidens: obesity, addiction, violence and crime – our national shame of widespread want in the midst of plenty. It’s not the income gap between Australia and New Zealand that matters, but the much larger gap between South Auckland and the North Shore.

I will end by going back to economists, and France. Many years before my brief, testy encounter with Professor Prescott, I visited that country for the first time. On the Customs arrival card, I gave my occupation as “economiste”.

“Ça n’existe pas,” snapped the official. That doesn’t exist. I didn’t argue, of course, but with my quite adequate King’s High School Dunedin schoolboy French was able to negotiate an acceptable password to enter the promised land – I think we settled on “professeur universitaire” – professeur meaning teacher, not professor, in French, of course.

And that was actually the extent of my culture shock in France. On this and many subsequent visits, I found myself, as expected, in a successful, stylish country, with funny, friendly people always kind to a francophile Kiwi. But the shock was that they did it all without the help of economists, these being an unknown species in France. No wonder Prof Prescott and his ilk were grumpy with them!

I then realised that all three of the post-war European miracle economies – Germany, Italy, France – had succeeded without the assistance (or hindrance?) of economists. And then, as the decades proceeded, we could add the Asian Tigers to the list: first, Japan, then Korea, Taiwan, Singapore and now China. No neoclassical economists required, thank you.
To illustrate: of the 86 people thus far awarded the new (since 1969) Nobel Prize in economics, only two won for work done in one of the eight countries listed above. Well over half of the economics Nobels have gone directly to just eight elite US universities.

Now, one non-American who most certainly would have won the first Nobel in economics if he had managed to live long enough is the great British economist John Maynard Keynes (died 1946). And Keynes was the only person with the calibre and charisma to possibly resist the post-war colonisation of the discipline by the American neoclassicists, led by the relentless genius Paul Samuelson of Massachusetts Institute of Technology.

As it is, however, his influence lingers. Keynes famously wrote that “practical men” are in fact usually the intellectual slaves of some “defunct economist”.Thank goodness the practical women and men who now run the world’s central banks and finance ministries are Keynes’ slaves in their recognition of the need for concerted international action to counter big bad-news shocks.

The corrupt US banking practices that exploded into the global financial crisis can be blamed on neoclassical neglect. But the reason that the GFC lasted only two years and was quite limited in its effects – compared with the decade-long Great Depression of the 1930s – is that the lessons that Keynes took from the 1930s were well learnt by the people who really matter: the politicians and officials running the fiscal and monetary policies of the world’s economies. And they have done it again, with remarkable success, using deficit spending to limit the economic impact of Covid-19, against anguished complaints from the neoclassical theorists.

Keynes also – and not quite so famously – looked forward to economists eventually achieving the status of “humble, competent people, on a level with dentists”. Well, we aren’t quite there yet – and who ever met a humble dentist, anyway? – but to be fair to my colleagues (and to me, for that matter), a lot of what many of us do is quite useful, nuts-and-bolts, applied economic analysis. But we still teach the American texts, and we still shy away from challenging the ideological bonds that prevent the flourishing of a political economy truly worthy of Aotearoa New Zealand.

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